The battle for the future of the Open Web is taking place as a new document model merges into a platform for highly graphical, interactive and information rich applications. Open source communities vie with dominant vendors Adobe, Microsoft, Apple, Cisco, Nokia and Google to stake out their claims as open source innovations collide with standards consortia and proprietary alternatives.

Monday, November 04, 2013

Excellent article explaining the CPU war for the future of computing, as Intel and ARM square off. Intel's x86 architecture dominates the era of client/server computing, with their famed WinTel alliance monopolizing desktop, notebook and server implementations. But Microsoft was a no show with the merging mobile computing market, and now ARM is in position transition from their mobile dominance to challenge the desktop -notebook - server markets.
WinTel lost their shot at the mobile computing market, and now their legacy platforms are in play. Good article!!! Well worth the read time
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The disappointing sales of (x86) tablet products using Microsoft Corp.'s (MSFT) Windows 8 and the flop of Windows RT (ARM) product in general somewhat unexpectedly had the net result of being a driver to maintain the status quo, allowing neither company to gain much ground. For Intel, its partnership with Microsoft (the historic "Wintel" combo) has damaged its mobile efforts, as Windows 8 flopped in the tablet market. Likewise ARM's efforts to score PC market share were stifled by the flop of Windows RT, which led to OEMs killing off ARM-based laptops and convertibles.

But suffice it to say, ARM Holdings and Intel are still very much bitter enemies from a sales perspective.

III. Profit vs. Risk -- Understanding the Modern CPU Food Chain

Whether it's tablets or PCs, the processor is still one of the most expensive components onboard. Aside from the discrete GPU -- if a device has one -- the CPU has the greatest earning potential for a large company like Intel because the CPU is the most complex component.

Other components like the power supply or memory tend to either be lower margin or have more competitors. The display, memory, and storage components are all sensitive to process, but see profit split between different parties (e.g. the company who makes the DRAM chips and the company who sells the stick of DRAM) and are primarily dependent on process technology.

CPUs and GPUs remain the toughest product to make, as it's not enough to simply have the best process, you must also have the best architecture and the best optimization of that architecture for the space you're competing in.

There's essentially five points of potential profit on the processor food chain:

[CPU] Fabrication

[CPU] Architecture design

[CPU] Optimization

OEM

OS platform

Of these, the fabrication/OS point is the most profitable (but is dependent on the number of OEM adopters). The second most profitable niche is optimization (which again is dependent on OEM adopter market share), followed by OEM markups. In terms of expense, fabrication and operating system designs requires the greatest capital investment and the highest risk.

In terms of difficulty/risk, the fabrication and operating system are the most difficult/risky points. Hence in terms of combined risk, cost, and profitability the ranking of which points are "best" is arguably:

Optimization

Architecture design

OS platfrom

OEM

Fabrication

...with the fabrication point being last largely because it's so high risk.

In other words, the last thing Intel wants is to settle into a niche of playing fabs for everybody else's product, as that's an unsound approach. If you can't keep up in terms of chip design, you typically spin off your fabs and opt for a different architecture direction -- just look at Advanced Micro Devices, Inc.'s (AMD) spinoff of GlobalFoundries and upcoming ARM product to see that.

IV. Top Firms' Role on That Food Chain

Apple has seen unbelievable profits due to this fundamental premise. It controls the two most desirable points on the food chain -- OS and optimization -- while sharing some profit with its architecture designer (ARM Holdings) and a bit with the fabricator (Samsung Electronics Comp., Ltd. (KSC:005930)). By choosing to play operating system maker, too, it adds to its profits, but also its risk. Note that nearly every other first-party exclusive smartphone platform has failed or is about to fail (i.e. BlackBerry, Ltd. (TSE:BB) and the now-dead Palm).

Intel controls points 1, 2, and 5, currently, on the food chain. Compared to Apple, Intel's points of control offer less risk, but also slightly less profitability. Its architecture control may be at risk, but even so, it's currently the top in its most risky/expensive point of control (fabrication), where as Apple's most risky/expensive point of control (OS development) is much less of a clear leader (as Android has surpassed Apple in market share). Hence Apple might be a better short-term investment, but Intel certainly appears a better long-term investment.

Samsung is another top company in terms of market dominance and profit. It occupies points 1, 3, 4, and 5 -- sometimes. Sometimes Samsung's devices use third-party optimization firms like Qualcomm Inc. (QCOM) and NVIDIA Corp. (NVDA), which hurts profitability by removing one of the most profitable roles. But Samsung makes up for this by being one of the largest and most successful third party manufacturers.

Microsoft enjoys a lot of profit due to its OS dominance, as does Google Inc. (GOOG); but both companies are limited in controlling only one point which they monetize in different ways (Microsoft by direct sales; Google by giving away OS product for free in return for web services market share and by proxy search advertising revenue).

Qualcomm and NVIDIA are also quite profitable operating solely as optimizers, as is ARM Holdings who serves as architecture maker to Qualcomm, NVIDIA, Apple, and Samsung.

V. Four Scenarios in the x86 vs. ARM Competition

Scenario one is that x86 proves dominant in the mobile space, assuming a comparable process.

A second scenario is that x86 and ARM are roughly tied, assuming a comparable process.

A third scenario is that x86 is inferior to ARM at a comparable process, but comparable or superior to ARM when the x86 chip is built using a superior process. From the benchmarks I've seen to date, I personally believe this is most likely.

A fourth scenario is that x86 is so drastically inferior to ARM architecturally that a process lead by Intel can't make up for it.

This is perhaps the most interesting scenario, in the sense of thinking of how Intel would react, if not overly likely. If Intel were faced with this scenario, I believe Intel would simply bite the bullet and start making ARM chips, leveraging its process lead to become the dominant ARM chipmaker. To make up for the revenue it lost, paying licensing fees to ARM Holdings, it could focus its efforts in the OS space (it's Tizen Linux OS project with Samsung hints at that). Or it could look to make up for lost revenue by expanding its production of other basic process-sensitive components (e.g. DRAM). I think this would be Intel's best and most likely option in this scenario.

VI. Why Intel is Unlikely to Play Fab For ARM Chipmakers (Even if ARM is Better)

From Intel's point of view, there is an entrenched, but declining market for x86 chips because of Windows, and Intel will continue to support Atom chips (which will be required to run Windows 8 tablets), but growth on desktops will come from 64 bit desktop/server class non-Windows ARM devices - Chromebooks, Android laptops, possibly Apple's desktop products as well given they are going 64 bit ARM for their future iPhones. Even Windows has been trying to transition (unsuccessfully) to ARM. Again, the Windows server market is tied to x86, but Linux and FreeBSD servers will run on ARM as well, and ARM will take a chunk out of the server market when a decent 64bit ARM server chip is available as a result.